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Market Plus: Jan 22, 2010: Bob Cropp, Bill Bruins, and David Oppedahl

posted on January 26, 2010


Market Plus: Jan 22, 2010: Bob Cropp, Bill Bruins, and David Oppedahl This program was made possible by the Corporation for Public Broadcasting and by contributions to your PBS station from viewers like you. Thank you.

Pearson: Coming up on a special edition of Market to Market, dairy producers, economists, and industry experts ponder the outlook for America's dairy sector.

Funding for Market to Market is provided by Pioneer Hi-bred, working growers to help put the right product in each field. Pioneer ... science with service, delivering success. From Madison, Wisconsin, the discussion continues at the rural economic summit.

Pearson: Welcome to the Pyle Center on the campus of the University of Wisconsin-Madison. And we are by beautiful Lake Mendota, and it's great to be here. Again, we're coming to you from the College of Agricultural and Life Sciences Economic Outlook Forum, and we've assembled a distinguished panel to answer questions from our live audience here in Madison and those submitted to Market to Market over our Web site over the past few weeks. And here to help us assess the recession's impact and prepare for the future are some of the top experts in key sectors of the rural economy. David Oppendahl is an economist at the Federal Reserve Bank of Chicago. He directs the Chicago fed survey of agricultural banks on land values and credit conditions and publishes the results in the ag letter. Bill Bruins is the president of the Wisconsin Farm Bureau Federation. He is also the general manager of homeland dairy, a family partnership consisting of 600 cows and 1,300 acres of crop land. And Bob Cropp, professor emeritus at the Department of Agriculture and applied economics here at the University Wisconsin-Madison. As a dairy marketing and policy specialist, Bob provides a monthly dairy situation outlook report. It's very widely read. Folks, we appreciate each and every one of you for joining us here for our second rural economic summit. Appreciate your insights in our first one and look forward even more here as we continue this discussion about the future of dairy. As we did last time, Bob Cropp, we're going to start with you because of your great overview of the dairy sector and a recap a little bit of 2009. Really, we kind of want to go back to '07 when dairy prices really started to take off. We saw a lot of expansion. We saw some bank lending out in California where there were literally interest-only cow loans just to see some expansion out there. We saw that through 2008 and the great growth in virtually all commodity prices. Huge demand for milk overseas. And then a correction, to say the least, as we hit the first part of 2009, the first quarter of 2009. Prices plummeted and the dairy industry really went into a short-term tailspin. Volatility is the name of the game in the dairy world now.

Cropp: Well, yes. I mean this was, however, unusual. Most of the past price declines in 2000, 2002, 2006 was because we were producing relatively more milk. We were here too in 2007, 2008, but the export market absorbed that. We were producing domestically in export, and we lost that. That dumped about five billion pounds more milk on the domestic market and drove those prices down. So to get a recovery required a reduction in milk production, which we're now seeing happening.

Pearson: It's happening nationwide, not so much here in the state of Wisconsin or the Midwest where you -- this state is still continuing to produce more milk.

Cropp: That's true. Actually all the Midwest states where you look at Minnesota, not as much as Wisconsin, but Iowa, South Dakota, and that. And due to some expansion occurring here, looking at cheaper feed up here versus area that got to buy their feed. And we're an area here because a good share of our milk goes to the cheese higher valued products, and our farmers get a higher price for the milk than they do out in the west.

Pearson: That's true. Also talk about the fact that obviously dairy pricing has changed. The old federal milk marketing orders are changed. They're certainly less significant. It's much more of a market driven enterprise. In an industry where you sell it or smell it, you've got to be a pretty good marketer.

Cropp: That's right. Look at it -- if cows are milked every day, that milk has got to go through the system. It's got to be processed. So you can store powder for a while, but basically things have got to move. Cheese because -- new cheese is aging. It doesn't take big changes either on the supply or demand side, because great changes in prices. That's what we've got with the volatility. It used to be the government put a relatively high floor under that price. But since the mid 1990s, that's been pretty well irrelevant, and so market forces have been driving these prices.

Pearson: All right. We're going to talk to a producer here who is involved in all of this and affected by it. Also leads the general farm organization. Dave Oppendahl, give us your summation, if you will, of what's happening. you cover the ag sector in the central Midwest of the Chicago feds district, a very important district and one that's certainly seen huge profitability, huge net farm income 2008. Much smaller number for 2009.

Oppendahl: Yes, the net farm income dropped off about 35 percent for the United States, according to USDA numbers from 2008 to 2009. And that stream of earnings was especially hurt in the livestock sectors including, obviously, dairy. The overall future looks better for 2010 with some prices rising but, at the same time, it's going to be interesting to see how everything falls out this year.

Pearson: We know we're off to sluggish grain prices. Certainly $4.50 corn is gone and we've seen a 50-percent pullback in corn prices. Bean meal was down $5 a ton just this week, so some lower input costs over on the livestock side and maybe a little bit better demand, at least if Bob is correct on what's happening on the dairy side and what's happening on the beef, pork, and poultry side as well. So the lenders that you talk to that you survey for your letter, how would you describe their outlook for the livestock sector going into 2010?

Oppendahl: Well, it was not so promising about six months ago, and so the sentiments then were fairly negative. I think they've improved a lot since then as hog and dairy prices in particular have risen. For the cattle sector it's still a little bit more troubling that the prices are down and not following the trend of the rest the livestock sector. Certainly the overall sentiment would be cautious, I think. Even with the increases, there's still a lot of negative spillover from previous years. So there's some problems with the cash balances and needing to allow the balance sheets to return and build up working capital before the operations are really in a better fiscal situation.

Pearson: Liquidations are something I think you track, and some of your lenders were looking to see perhaps more liquidations particularly. And we've seen in the beef cattle trade -- we've seen a lot of dispersion -- beef cow dispersions. Very small cow herd out there to begin with but, again, very sluggish demand side on the supply side for beef?

Oppendahl: Well, it has been. I think that with the economy in the United States starting to recover a little bit as well as the global economy moving up, that will hopefully boost the restaurant industry, as well as export markets. And between the two of those, maybe there will be some improvement in beef demand, you know, especially when people start eating out more. That's one of those issues that we would hope would improve in this year.

Pearson: All right. And hopefully that's going to be the case. Certainly the early indicators are that way. Bill Bruins, you're a dairyman and your 600 cows is a darn good involved business with your two sons. Talk about 2009 for you and your operation. Obviously pretty sophisticated marketers and you folks are trying to take advantage of this volatility when it occurs, right?

Bruins: Absolutely. But any dairyman that lived through 2009 and didn't recognize the importance of international markets really had his head in the sand. And as -- as a farm organization, we're really focused on what the marketplace can do for us. And our current dairy policy is market driven, but it's domestic market driven. We have to figure out a way to capture the international market with our dairy policy moving forward. If you look at trade, two-thirds of our ag trade goes to Mexico and Canada, and we have to make sure we're staying in friendly relations with our two major trading partners. Trade agreements all over the world are going to be increasingly important. Milk proteins are in increasing demand in countries like China. That's where our future is and that's what have to focus on capturing.

Pearson: As president of Wisconsin Farm Bureau Federation, do you think that word has gotten out there now?

Bruins: Well, you know, our organization spent a good deal of time discussing supply management and seeing if there wasn't a good easy way to control supply. But if you look around the world, it's never been easy and it's never really worked. The EU is trying to wean their dairy farmers off of supply management now. It's an ugly scene. So we continue as an organization to stay focused on the market driving our price.

Pearson: All right. Where do you see the greatest opportunities? You mentioned China, Asia certainly. This is part of the world that for years we thought was lactose intolerant. They want our product. They need it. Their growing middle class, a hundred thousand people a day join the middle class around the world. That's a huge market.

Bruins: Well, I think one of the -- one of benefits we have dair6ying Wisconsin is that we're very diversified. We produce about 600 different types of cheeses. There is, I'm told, a number of products yet to be developed that the world is looking for. And I believe we're going to be flexible enough and nimble enough moving forward as a dairy industry to capture some of that world market. China is a big one obviously but, again, tied to the economy there as well.

Pearson: All right. Talk about the flip side in addition to a lot of milk production, 2009 from a crop production standpoint and a hay production standpoint.

Bruins: We had good crops in Wisconsin. We really did. Our dairy is going to be supported just fine by the crops that we grew. We feed a lot of high moisture corn. And this year -- this year it's a great year for high moisture corn.

Pearson: Good year for high moisture corn. Yeah, you bet.

Bruins: So we're doing just fine with our dairy cattle. They're milking well and they're healthy. We're looking forward to a good year in 2010.

Pearson: All right. Hay production good too?

Bruins: We had a good hay crop. And obviously, over the winter we always get concerned about how much we might lose to winter kill, but so far I think we've had good winter weather. And good lord willing, we'll have some healthy alfalfa plants come spring.

Pearson: I'm sure you will. Bob Cropp talk about that, though, the fact that so many of these entities here in Wisconsin are like Bill's where they're producing their own grain and their own forage products and they can roll right along even through a year like 2008 where you had $7 corn and $16 beans. We can still make it work.

Cropp: We couldn't because, well, production cost was up but not as much as those people were buying the grain. When you consider most of that grain is in central Iowa or someplace, got to be trucked clear across the country to Idaho or California. We don't experience that. We got the distillers grains and some byproducts here close by, and it gives us some real advantages, yes.

Pearson: All right. Talk about the food and fuel issue, Bob, because I know that was certainly one that some dairy groups were very much opposed to the whole idea of biofuels because the increased demand for corn and the increase prices. Obviously we've had a couple of years we've produced an excess of 10 billion gallons of ethanol, 4.5 bushels of corn crop. As the USDA reported a week and a half ago, we don't seem to have any problem having corn left over.

Cropp: That's right. Well, I think what we're saying here due to the ethanol biomass industry, we'll have a higher grain cost. I mean corn probably $3 a bushel and above, maybe not back to the $7 like we had. So higher production costs. So that's why I think you're seeing that long run, higher milk price, higher cattle, hog prices have to be to support a higher input costs due to some of that. That's correct.

Pearson: Talk to us about the fact that we have seen some movement out of California out of the West Coast coming toward the Midwest and mid-south regions to move those enterprises here. A lot of issues out there, environmental and otherwise, but the one you touch on, of course, is the feed issue too.

Cropp: Feed is there and there's land areas. And even in California, one thing that slowed their production, they lost the big cheese plant, that's part of it. But it has not been the most conducive environment to build a new choose plant, so you see major a cheese company like Hilmar or whatever building in Texas or even Colorado and coming this way where milk production is growing, and they look like they will continue to grow. So we look at -- in the processing side. But up here in Wisconsin also right now, we're looking at a lot of our plants are fall, so we're looking at the need to invest in the processed side. But, yeah, they've located here. Not that California is done growing, but you're not -- the whole west -- even Idaho, you're not going to see the growth that they had. I think you're going to see the upper Midwest and you'll see the states like Kansas or some of those come a little bit. But we have a strong infrastructure here, strong processing. We're a good location for marketing as well. We can ship cheese to Dallas, Texas, less distance than California can or the northeast. So a lot of pluses here. So there's a lot of optimism in the dairy industry. And we're hearing processors talk about investment now, where a few years ago they were chasing the shrinking milk supply. They weren't going to put another dollar in processing, and now it's the other way coming back. So it looks good.

Pearson: The dairy industry has always done a great job of promoting their product, and certainly that's been a factor. The "Got Milk?" campaign, some of those issues. Do you think we'll start to see this fluid milk consumption start to improve?

Cropp: Well, actually it picked up. It went down. You know, 20 -- $20 milk creates some problems on the demand side.

Pearson: Right.

Cropp: $10 at the farm side. But with the switch to more home eating, actually fluid milk sales, which went down one percent in 2008, is up more than one percent in 2009. And that probably will continue. Of course, some of that -- eating affected the beef industry too, not eating as much in the restaurant, but actually food sales are up. By food sales represent only about 28 percent of the milk use. Instead of manufacturing, the cheese industry really is the primary driver and, of course, that's what we do up here. Bill mentioned the milk proteins, domestic market. Well, the international market, the whey proteins and protein isolates and all that for developing countries as well as developed countries. So there's some real opportunities in product development in marketing, and we do some of that up here.

Pearson: Absolutely. A growing middle class is certainly good news for meat, milk, and eggs, and the milk part is certainly covered here in the state of Wisconsin. Dave, let's talk to you a little bit just before we go to some questions. And that is general economic outlook, we mentioned reduction in farm income. We had a huge balloon in farm income in 2008, so the 2009 reduction isn't that big of a pull. Going into 2010, lower input costs for the livestock side, lower fertilizer inputs, maybe a little bit higher fuel price for 2010. It should look like a fairly strong underpin, the agriculture economy, fairly well?

Oppendahl: Well, we don't know for sure yet because corn and soybean prices have been coming down enough that that could be a factor. Although there again, a good marketer will be able to take advantage of pricing opportunities that were already present. So they can overcome that. I think that it would seem that the indications are that net cash income would be poised to increase slightly this year, but I wouldn't think that we'd see a big bounce back.

Pearson: All right. I think one of the things that people are curious about, bob mentioned Secretary Vilsack. There was $350 million went out to the dairy industry direct from the USDA. What kind of an impact does that have, do you think? It's a drop in the bucket when it comes to total farm income for the dairy sector.

Oppendahl: Well, it's a nice indicator for people that something is trying to be done at the national level. And it gets people thinking more positively. So it's -- it isn't a huge amount, like you mentioned, but at the same time the rebound in exports would be a much bigger factor, I think.

Pearson: All right. Well, let's go to our audience. We have a group here at the Pyle Center on the new University of Wisconsin-Madison campus. We have a young man there with a question. Sir, tell us who you are.

Cory Geiger with Hoard's Dairyman Magazine. 2009 hit the dairy and swine and hog sector quite hard. How long do you think it's going to take for the balance sheets to heal following this situation?

Pearson: Good question. Bob?

Cropp: Well, I think for some farmers, the loss of equity will take at least a couple years, maybe longer. You're not going to do it in one year. So it will just take a couple years to build back some of that loss in equity in some of those. Bill is not going to take as long. He has risk management. Overall -- you're not going to do it because milk prices, the first part of the year you're getting the 15, 16. That sits back with good cash flow payment. It's not building back a lot. We've got to get to that 17, 18, that would be towards the end of the year and hopefully into 2011.

Pearson: Bill, do you want to follow up on that?

Bruins: I think Bob is pretty good at analyzing income and expense, and I think he's pretty close to being dead on, on this forecast. I just hope that his forecast is guaranteed like he said it is --

Pearson: That's right. It's a hundred percent guaranteed.

Bruins: -- because we budgeted for an average price of $16 a hundredweight for this year.

Pearson: Perfect.

Bruins: Last year our average price -- pay price was $12.31.

Pearson: That includes those lows that we had in there too.

Bruins: That's right.

Pearson: Yeah. All right, yeah, fully guaranteed. He's an emeritus professor, so we expect that to be a hundred percent accurate. Here's another follow -- all right, Bob, take this one too. This is one that came in from one of our viewers through the Internet. Can the government react fast enough to correct economic problems, or will the markets correct themselves? I think you've talked about this in a general way.

Cropp: Well, I guess, I'd say high prices -- you're right, first of all prices -- to low prices. It's the market that's going to do it. I mean the government tries certain things like buying up more cheese, which they plan to do, and the export incentive program and a few things like that. But basically it's going to take the market forces. And we're seeing those happenings and actually seeing some nice recovery because of stronger market forces, both from stronger domestic demand, export market, and some decline in production.

Pearson: The government checks that were sent out, the 350 million that the secretary signed, it really came at I think a day when we first broke $15.50 on class III milk prices. So they've discussed it back when it was $9 mailbox price, and when the price recovered, that's when the checks came out. Maybe that answers the speed of the government. All right, Bill, here's a question for you. Farm Bureau has been very much involved -- very sensitive to the fact that we have an aging farm demographic as far as producers are concerned. A number of young farmer programs the farm bureau is involved in. Give us your thoughts on the outlook for young and beginning farmers to get into the dairy industry in 2010.

Bruins: I wish I were that young again, because I think there is tremendous opportunity moving forward in the dairy industry. Financing, you know, getting collateralized is obviously going to be a challenge, but it's always been a challenge. And we have a great deal of family farms that are passed on from one generation to the next. We're going to continue to need to depend on that. And I'm seeing a lot of people my age now actually encouraging their kids to farm and that wasn't that way a generation ago.

Pearson: It certainly wasn't twenty ago. In the '80s I remember being in Wisconsin and a lot of frustration about that inability for -- to get started. You're saying the opportunity is there now.

Bruins: Yeah, we're, you know -- they're saying that there just aren't young farmers out there. At our annual convention last fall, we had just about 300 young farmers out of about 1,100 people. So they're there and they're excited. They have a passion to farm. And there isn't anybody going to be able to hold them back.

Pearson: Dave, what about the lenders? Are they supportive of this? Obviously you've got to have a lot of things when you come to the table when you talk to that lender about getting any business started but particularly one that's cyclical in nature and involves the dairy industry.

Oppendahl: Well, I think most lenders are very encouraging of farmers in a -- young farmers to get established because that's going to be their next generation of loans. They need to be able to build that business for the future. So I think there's a lot of encouragement but the problem, of course, is that they can't extend loans without the proper credit conditions. And being able to establish that is important. So it's great that farm organizations have helped young farmers get started. The USDA has programs to try to help young and beginning farmers. You know, the farm credit system that has a mandate to help with that as well. So there are some resources out there and maybe it's a challenge to get going but I think people want to help support you because we want to build a strong industry and keep it going.

Pearson: All right. And one of the questions I think is -- has a good bearing to what it is we're talking about here -- and, David, this is for you. What areas of the economy does the fed see the most improvement?

Oppendahl: The economy seems to be improving in the manufacturing sector. There's been a lot of inventory out there, and that's something that has been improving. Inventories were drawn down, and now they're starting to be built back up. There's a lot of things that are happening, but at the same time, you know, it's kind of ragged right now. So we'll have to see how things move forward.

Pearson: All right. Well, of course, interest rates are key to all that. I suppose you don't want to give us any insight as to what you think is going to happen there.

Oppendahl: No.

Pearson: I didn't think so but I had to ask, Bill. You might find someone who will give you something. We're getting close to time to wrap up. I want to come back again to you, Bob, one final time and talk a little about -- you've had a long career following these markets, and you've had a long career following a lot of producers. There's been a lot of leadership certainly from the dairy industry that's come from the state of Wisconsin. Give us the state of the industry now as we go into 2010 for the dairy industry from the state of Wisconsin's standpoint.

Cropp: Well, we're in pretty good shape, I mean, because we had two good years, 2007, 2008. So that put dairy farmers in a pretty good position to weather the storm. We've got some problems out there. No question about it. But overall we're very solid financially. There's some individual farmer loans, but overall real good. Things are improving and price wise substantially. And so you just have to say we're looking at least, you know, $3 or $4 minimum probably improvement in average milk price. I think --

Pearson: We're writing that one down, Bob. That sounds good.

Cropp: So really there's a lot of optimism. I take it all for producers themselves. We've got two farm organizations here, Professional Dairy Farmers of Wisconsin and the Wisconsin Dairy Business Association. They started a few years ago. They were sick and tired of doom and gloom. And they themselves took to talk to one another, how to do things, change ideas, and educational programs. And plus, a very positive state legislator here that passed some legislation to foster investment tax credits -- legislation to foster growth and industry. So from -- you know, from the state legislator and farmers and that, there's a lot of optimism long term for the dairy industry in Wisconsin.

Pearson: Very good to hear. You mentioned professional dairymen and dairy business association. I was here a year ago for the professional dairymen's. What an excellent meeting. What a place to get charged up and hear good ideas, and that was right at the -- of these low prices. David, same question. Wrap up 2010. As you look forward into your crystal ball, how do you see it?

Oppendahl: Well, it looks like it's a more promising year. It seems like we're headed in a direction where dairy is more positive. The hog industry is more positive. Cattle may be lagging a little bit but, at the same time, good operators will be able to, you know, persevere, and we hopefully will see a lot of improvement this year.

Pearson: All right. Look forward to it. Appreciate your insights very much. Bill Bruins, our dairyman and president of the largest general farm organization in Wisconsin, your thoughts for 2010? You always make a prediction of the five most important things. What do you think is going to happen in 2010?

Bruins: Absolutely the economy is going to be crucial in 2010 for the entire ag industry in the state of Wisconsin. $59.5 billion of economic activity. We have a lot of diversity. We have a lot of vitality. And we've got good land. We've got access to plenty of water. A lot of great things going for us, but we have to seize the opportunities that are there. And you're darn right, that positive attitude is important.

Pearson: Well, thank you so much. Appreciate that. Appreciate that comment. Bob, thank you. Dave, thank you very much. Appreciate it. That's going to wrap up the expanded discussion here at our special rural economic summit. Again, I want to thank all of our panelists and, of course, our audience here at Madison for joining us. Of course, we want to remind you that we'll produce two more of these special road editions of Market to Market in the months ahead. Future programs slated to be held in Nebraska and Kansas, and you're invited to join the discussion by submitting your questions and comments at our Web site. We'll also be posting new content to our blog in the days and weeks ahead, and you're invited to join the discussion. Of course, be sure to join us for Market to Market next week when we'll return to our regular format. Until then, thanks for watching. I'm Mark Pearson. Have a great week and drink more milk.

Market to Market" is a production of Iowa Public Television, which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hi-bred, working with growers to help put the right product in each field. Pioneer ... science with service, delivering success.

This program was made possible by the Corporation for Public Broadcasting. And by contributions to your PBS station from viewers like you. Thank you.


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